The Power of Compound Interest

It's the gift that keeps on giving.

Compound interest chart

Albert Einstein is often quoted as saying that compound interest is the greatest discovery of the 20th century. There’s no proof he said that, but it’s probably not far from the truth.

Here’s why: If you invested $10,000 at 5 interest for 20 years, you’d earn $17,126 in profit (ignoring taxes and fees). But if you doubled the rate to 10%, how much would you earn?

It might seem that doubling the rate would double the return, but that’s not the case. Doubling the rate increases the return by nearly 369%. Instead of earning $17,126, you would earn $63,281!

That’s the power of compound interest. Money doesn’t grow linearly — it grows exponentially.

The accompanying chart shows how much more would be earned through compound interest if the rate were increased to 15% or 20% — the latter providing a return 30 times higher than the original 5%.

Of course, don’t ask me where you can earn a guaranteed 20% per year without risk. I don’t know.

And If I did, why would I tell you? I’d be too busy investing my own money. So the next time someone offers you a super-hot investment deal, ask yourself: Why would he tell me? If he told anyone, it would be his family and friends — not a total stranger.

This is a hypothetical illustration meant to demonstrate the principle of compound interest and is not representative of past or future returns of any specific investment vehicle.

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